Ethereum Sees Record Near-Two-Year High amid Concerns Over Bullish Leverage Surge
Summary:
Between Feb 26-28, Ether's price surged 14%, peaking at nearly a two-year high of $3,484. Concurrently, the cost for bullish leverage positions also rose, leading to concern over the risk of inflated optimism. Analysts attribute the optimistic sentiment to the upcoming Dencun hard fork, promising significant enhancements for Ethereum. Despite concerns, it's clarified that not all Ether leverage demand is speculative, with some traders requiring leverage while gathering funds. However, consistent periods of high leverage costs may suggest excessive bullishness. Currently, ETH longs run a liquidation risk.
In a span of two days from February 26 to February 28, Ether (ETH) prices experienced a 14% increase, peaking at $3,484 — a near two-year record. However, this surge was associated with an uptick in the price of bullish leverage positions, raising some eyebrows due to the inflated optimism risk of cascading liquidations, especially in light of Ether's flash crash on February 28 which saw values plummet to $3,180 momentarily.
It's crucial to understand that not all demand for Ether leverage is influenced by speculative bets. There is, indeed, a set of traders who may require brief leverage while gathering funds, either through other asset sales or awaiting inflow from deposits. These activities, while common under market pressure even for pro arbitrage desks, usually lead to a rise in funding rates for a few days or potentially weeks.
Some market observers assert that the heightened positivity toward Ether is due to the forthcoming Dencun hard fork, scheduled for March 13. This upgrade will introduce various enhancements, notably proto-danksharding, an initiative intended to lower layer-2 transaction fees. It will significantly cut the data registry expense for Ethereum, the preferred scaling solution, rollups.
Uniswap, the foremost decentralized exchange (DEX) on Ethereum, has already revealed its plan to initiate a v4 implementation, indicating that users are likely to see appreciable benefits post the Dencun upgrade. Additionally, TrustlessState, an analyst on the X social network, anticipates a 90% reduction in network inscription charges, likely enhancing an already thriving meme economy.
One shouldn't overlook the impact of inscriptions on network costs or uptime, regardless of how they're valued or their market potential. For example, Avalanche, a blockchain purporting superior scalability versus Ethereum, suffered an outage on February 23 due to overwhelming inscription demands in the mempool, as per an Ava Labs spokesperson.
Ethereum's scalability issues have persisted, with the average 7-day transaction fee remaining above $4 for the last four months. Yet, this didn't deter the total network deposits (TVL) from reaching a record high since July 2022 at ETH 30.5 million.
The deposit growth signifies the development of new decentralized finance (DeFi) sectors such as liquid staking, represented by Lido, EigenLayer, and Rocket Pool, and the efficacious strategies of interoperability protocols, including Summer.fi and Instadapp. As such, the growing demand for Ethereum’s decentralized applications also fuels investors' desire for ETH.
Temporary hikes in Ether funding rates are not uncommon. To truly gauge whether exaggerated leverage contributed to Ether’s recent surge toward $3,400, an examination of ETH derivatives markets must occur. A net positive indicates increased bullish leverage demand, and a net negative suggests the latter.
Previous precedents show that, as seen on November 9, 2023, the Ethereum funding rates surged beyond 5% per month due to a 13.3% rise in Ether price, albeit normalising to a 2% leverage cost the following day. Longer durations of high leverage costs generally signal excessive bullishness.
Surprisingly, market instability on February 28 triggered $102 million in ETH forced liquidations, with longs representing $66 million. Subsequently, leverage on pre-existing bullish positions increased as Ether's price crashed to $3,180.
Noticeably, Ether's current 0.06% funding rate, translating to 5.6% per month, is substantially above the past few weeks' average. Such levels are typically deemed untenable unless maintained for a significant period - weeks perhaps. Based on this, ETH longs risk liquidation currently, but attributing the spike to high leverage is misplaced, given that the indicator was relatively stable up until February 27, despite a 42% rise in Ether price over the preceding month.
Published At
2/28/2024 10:00:00 PM
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